Motley Fool Hidden Gems Investing - Airbnb Leaves NYC, Joins S&P 500

Episode Date: September 6, 2023

New York City cracked down on short-term rentals, but is it a big deal for Airbnb?  (00:21) Ricky Mulvey and Jason Moser discuss:  - How restrictions on short-term rentals could impact Airbnb’s growth story.  - Why investors are sour about AMC’s new share issuance.  - One company managing its share count well. Plus, (15:20) Deidre Woollard interviews Oliver Franklin-Wallis, author of “Wasteland: The Dirty Truth About What We Throw Away, Where It Goes, And Why It Matters”. Companies discussed: ABNB, EXPE, AMC, LOW Hosts: Ricky Mulvey, Deidre Woollard Guests: Jason Moser, Oliver Franklin-Wallis Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. The city that never sleeps now has fewer places to go to bed. You're listening to Motley Fool Money. I'm Ricky Mulvey. Joining us now is Jason Moser. Jason, good to see you. Hey, Ricky. How's it going? Going well. Airbnb has lost a city, and that is New York City. I'm going to run through some of the rules that Airbnb has to follow, something they are calling a de facto ban in what is called Local Law 18. All right, Jason, here are the new rules. Hosts can only rent a place where they live. Hosts must be present during the stay. Hosts and visitors must leave the doors inside

the dwelling unlocked so occupants can access the entire unit. There's an exception if you are using the room privately. And Airbnb units are limited to two guests, and you've got to register them. All right. Is this a good headline, or do you think this is a long-term problem for Airbnb? So, on its own, I don't know that it's a very good headline. I think it probably catches a lot of attention. So, it's not a great headline, I think, from that perspective. I wouldn't call this necessarily a problem for Airbnb on its own, but I think this is a sign, at least, of headwinds or some challenges, perhaps, to the growth assumptions going forward for the business. I mean, I don't think this is something that, you know,

this isn't some Airbnb killer, right? I mean, let's get that out of the conversation now. That's an even better headline, though. Well, yeah, there you go. New Airbnb killer. You know, this is why we do what we do. But I do think, again, this is something that at least makes you start to question the growth assumptions going forward for the business. This isn't just about New York City, but it's more so what it portends, how other communities, how other cities or municipalities, how they're going to react to this

in order to help shape their laws on the matter. When you talk about New York City, obviously, that's a very, very large market. I think it's something like 40,000 plus Airbnb listings in New York, according to data from inside Airbnb. But when you put that in the context of Airbnb's overall network, they have over seven million listings around the world, and to date over one and a half billion with a B, cumulative guest arrivals. This is clearly a very large company, a very large network. I think it's important to remember this is a global company. This is something that this is probably a bit more of a problem that we focus on here at home. You look at something like Europe, for example, it seems like they've had a bit more success in

working with the EU and all parties involved to come up with middle-of-the-road solutions that can work for everyone. The reason why I bring that up is simply because the EU is home to over one million hosts on Airbnb, which is more than any other region in the world. While we here at at home love to focus on things here at home. It's all so worth remembering. This company's opportunity is the entire world, and that does matter. Yeah, I think rent also might be a sore spot for probably the most expensive location to rent in the United States. I'd imagine. To your point, New York City is not the first town to put some limitations on Airbnb. It seems to be the most stringent, though. Many cities require licenses. Some cities limit the number of days

that an Airbnb can be rented in San Francisco, that's 90 days. In Amsterdam, it's 30. But like many companies, it went first before figuring out the regulatory landscape. We'll start our business here and then see what happens. Do you think that strategy is going to continue to benefit Airbnb? Now that they're a mature company, do you think they have to ask questions first? As they mature, I think you probably right? It gets to be more of an ask questions first. I think for the time leading up to now, it's probably a lot easier just to ask for forgiveness later, and I think that works out for a lot of us in a lot of ways. But this is one of those things that comes with being a disruptor

and finding new solutions to old problems. It's not to say that Airbnb's way is the way, but their way certainly opens the conversation up to a new way. I think that's ultimately what we're looking at here. I think of other companies that have come into a big space like this and disrupted. Uber stands out as one. We've seen them going through regulatory ebbs and flows, the whole gig economy thing. It's not necessarily to say that Airbnb's way is the way, but this opens up the conversation to a new way. Again, like I was saying earlier, this is something New York City is just one little piece of the overall puzzle here. You do have to ask yourself the question from a global perspective, is this just a really, really loud minority?

Maybe so, maybe not. I think as real estate goes, it is all about location. Some places will welcome stuff like this more than others, particularly here domestically. As we know, the United States is a big melting pot going from the east to the west to the north to the south. there are a lot of different perspectives on things like this. Those that don't want it, they find ways to regulate it, and then those who do want it, find loopholes. All I heard you say there in referring to New York was that it's really loud and a small piece. Minority, maybe not, but loud, absolutely. Anyway, Airbnb, there's that New York City story, but it also joined the Standard & Poor's 500, which the stock seems to be reacting

to. Which story do you think its shareholders should be paying more attention to? Absolutely, the New York City story. Joining the S&P is great. That comes with a little reputational boost maybe. It brings your stock more into the fray as funds rebalance. Maybe it brings you more into the conversation for investing nerds like us. But this is ultimately, the S&P news ultimately is nothing that really contributes to the fundamentals of the business. It can be a little reflective of the fundamentals up to this point, but ultimately, it's nothing that really contributes to the fundamentals of the business. Whereas New York City, again, maybe not just on its own, but this idea in general, this longer-term trend and watching

how this plays out, this very much will play out in the fundamentals of the business. We'll only learn more in time. Let's talk a little bit about those fundamentals. Revenue is growing at an 18% year-over-year clip for Airbnb, you would think that it would be feeling a post-pandemic hangover. Why do you think this business is still growing the way it is? Well, I think one thing, certainly this is a disruptor, and I think they have taken an old state space in traveling and the way that we as travelers have been used to doing things, and they've given us new options, and in many cases, really impressive, viable, attractive options. Again, going back to that global opportunity, remember, travel in total is

a $2 trillion global opportunity. This is just a huge market opportunity. Now, obviously, that's not all Airbnb's market opportunity, but it's a good portion of it. It just, again, goes to speak to the massive opportunity there in front. But then, when you look back at the company's most recent quarter that they reported, they are really seeing a lot of trends continuing to go in the right direction. Active bookers grew in every region. They had more first-time bookers compared to a year ago. They mentioned that guests are traveling even farther now. Whenever we talk about cross-border, I think a lot of times cross-border is something we talk about with payments like MasterCard and Visa. Cross-border is something I think you need to get used to hearing

with companies like Airbnb, cross-border nights booked increased 16% in the second quarter versus a year ago. People are traveling farther, going into different countries. Asia Pacific, where really inbound travel in Asia Pacific was very hampered over the last several years, that was 80% versus a year ago. Then ultimately, guests are also staying longer with Airbnb. In quarter two, they noted that long-term stays remained 18% of total nights booked. I think a lot of us us were wondering if maybe that number wouldn't start pulling back as the world got back to normal. It seems like right now, that number is holding steady, which is encouraging. But I think when you put all of those things together, that really tells a story of a business that is still,

as Ron Gross might say, firing on all cylinders. Yeah, but you're going to pay for that growth if you're an investor. It trades at about 35 times forward earnings. That's about triple the price tag of competitor Expedia. It's also doing well, operating income of around $2 billion and a very solid return on invested capital above 30%. Any thoughts of the valuation, the growth that those Airbnb investors are paying for? Yeah. Full disclosure, I actually recommended this stock to our members back at the end of June. It's up around 13% or so since then. My basic thinking back then, all the way back to June, was ultimately looking out through 2027. I believe they'll be able to continue growing

that top line somewhere in the range of 12% to 15%. To me, that seems more than achievable compared to historical results. That really does also take into consideration some of these regulatory headwinds that they may witness from time to time. Ultimately, I could see them more or less doubling operating income versus what they earned in 2022, if not better. You look at the stock today, it's around 23 times free cash flow. That's actually 30 times if you back out the stock-based compensation operating cash. I wouldn't call this a steal by any stretch, but I think it's a reasonable time to consider opening a position. I think this is one where you maybe consider building a position over time and adding on points of weakness. Because again,

to me, like that Rule Breaker mentality, looking for those top dogs. Airbnb just really stands out as one of those top dogs in the travel industry. Last question before the next story. Let's say you've got a trip booked to New York City. Are you staying in a hotel or are you taking a roommate? I'll tell you, going up to New York City, that might be a little bit of a stretch. I think I wouldn't mind paying up for the hotel, but every once in a while, I look back at what we did with Paris a couple of years ago with our family. We did an Airbnb there on the outskirts of the city, and that worked out real well. I don't know. With these new regulatory changes, I'm probably opting for a hotel, but if you know somebody and you can find

the right place, maybe that'll sway my decision-making. Depends on how cool the host is. Let's move to AMC. Movies are back, but maybe not the theater chain. The stock is down about 20% today as of the time of this recording. On news that AMC will be issuing 40 million new shares, That's about a 6% increase from its current share count. The company has done this before, Jason. You like following share counts of companies. Why do you think its investors are taking this news so poorly? Well, ultimately, because it doesn't solve the problem. It's like with many things. This is just a short-term solution to a long-term problem. This just really reiterates the challenges the business is facing. Traffic is down. The top line isn't going anywhere.

profitability is hampered. The company's capital position continues to be challenged. This is something that buys them a little time, but at the end of the day, it's just that. It's a temporary solution to a business with some greater fundamental issues. Yeah. The reason it's issuing shares is to, quote, bolster liquidity to repay, refinance, redeem, or repurchase its existing indebtedness and for general corporate purposes. What does that word salad mean to you? You know what they say, you can't borrow your way out of debt, Ricky, and that does feel a little bit like what this is. Ultimately, at the end of the day, what this means if you're

an investor in AMC, you better pack a lunch because it's going to be a while. I think it's also important to note that this company over the past 12 months has about 3X its existing share count. Perhaps those long-term investors might be feeling a little diluted. I don't want to end this in a totally negative place though. We're a little bit negative right now. You could talk about AMC share count or the fact that it doesn't really own any of the property that its theaters sit on, but let's end in a more positive place. What's a business that you think is managing its share count well? I love your glass half full perspective there. I think that's exactly the right

way to end the show. I did a little bit of thinking over this when you posed the question earlier. One company that stands out, when it comes to share management, you want to either see these issuances going to good investments. Companies will issue shares to make acquisitions, but more often than not, we talk about share repurchases. I guess you just want to make sure that the share repurchases are doing what they're supposed to do, which is really bringing that share count down. You bring that share count down, it makes every share out there worth, in theory, a little bit more. One company that stands out to me in regard to repurchases, you look at a company like Lowe's. Marvin Ellison, I really give him a lot of credit for doing this.

He's had some challenges, I think, just with the business itself. Part of that just is the nature of the business and how mature it is. But Lowe's has brought the share count down by 218.8 million shares since 2019. That's about 27.5%. Now, they spent $43.8 billion on share repurchases all through the way to buy those 218.8 million shares. That's a cost basis of around $200. Shares today, $230. You look at the total return for Lowe's since 2019, shareholders are up 130%. I feel like they've done okay, especially for a business. Again, it's not necessarily a challenge business, but it's in a mature industry. It's only recording top-line growth annualized over the last five years, around 5.7%. You consider that and

then you look at what they've done from a capital management perspective. I think they've done right by shareholders. It's nice to see a company buying back shares and reducing its share count. Jason Moser, appreciate your time and your insight. Thank you. You hear companies talk a lot about how things are made, a little bit less about where they end up. Oliver Franklin Wallace is a contributing editor for Wired and the author of Wasteland, the dirty truth about what we throw away, where it goes, and why it matters. Deidre Willard caught up with Franklin Wallace to learn about the business of trash and the goldmine of electronic waste.

one of the lines you had about midway through the book that really stuck with me was about how little of we see of the way things are made and how little we understand of the true cost so why was it important for you to tell these stories yeah i think that's right you know the thing that struck me from the outset of this journey is that you know we spend as a society a lot of time talking about where stuff comes from right we care about whether things are all organic whether they're free trade and air miles and all these kind of things that we kind of think about with our purchases but we spend or historically have spent much less energy thinking about where it goes afterwards but you know as i kind of explore in this book quite often

these days in this kind of global economy that journey is just as long and and there are a huge number of uh variations and where your things end up quite often things are getting loaded on container ships and going halfway around the world before they're being disposed of and the impact is is quite profound actually so you know i use the example of the solid waste uh industry is estimated to be about five percent of all greenhouse gas emissions food waste which is calculated separately is thought to be eight to ten percent of all greenhouse gas emissions according to the ipcc so those two figures together give make it you know the waste uh it is a huge environmental challenge before we start talking about why the ocean is full of plastic and or and those kind of

the tangible uh elements of the pollution that we kind of see in our in our everyday lives so the thing that kind of fascinated me was like okay well how did we get to this state where this the ocean is full of you know the pacific ocean has a garbage patch you know five times the size of mexico in it and how you know what what how did we get here and a big part of the answer is because we've kind of historically treated waste as something that should be out of sight and out of mind and as a result it's something that has kind of you know been on the periphery and my hope is that this kind of book and can start a conversation an ongoing conversation i should say because you know over the last few years as i've been kind of reporting this story

The level of consciousness around waste and recycling and those kinds of things has changed hugely, which has been really encouraging, but there's still quite a long way to go. So hopefully this is kind of a way to kickstart another conversation. One of the things that you just mentioned is that, you know, out of sight, out of mind, right? One of the things that many countries have done for years is export their trash, but the economics of it, that's kind of shifting. So what are the long term consequences of that when we can't just kind of ship it away from us?

Yeah, that's right. So this story really started in 2018 for me, because for people who don't know, for the past, really for the past two decades, the story of waste has been the story of the growth of China. And a lot of the stuff that we were throwing away and particularly things to be recycled, whether that's scrap metals or plastics, was being sent to China, which, you know, the global industrial hub to be melted down and remade. The problem is, is that, you know, we were sending thousands and thousands of container ships loaded with garbage every year back to China. and often what you we were sending wasn't very high quality so it was then you know that things were mixed badly and or it was dirty and essentially unusable partly because what we talked about you know like no one was really checking and there was this sense that okay well they're not going to send it back so you can kind of get away with a lot and what ended up happening was in about 2018 the chinese government turned around and said right we've had enough of this

you're sending too much garbage like it's polluting our environment we're producing enough of this stuff locally that we don't really need the materials anymore and they shut their doors to the international waste trade more or less you know they pass these incredibly stringent environmental curbs on what could be what waste could be important and all of a sudden basically overnight the entire global like waste economy kind of crashed and we had we saw a bunch of waste companies uh particularly in places like california and on the west coast where there were a lot of exporters going bust and the waste markets in the international um waste trade essentially had this kind of panic of okay well what are we going to do with all this raw material and it ended up

flooding places like southeast asia malaysia indonesia vietnam thailand and in the intervening years has been a story of essentially kind of whack-a-mole because you know plastics will flood into a into a country like vietnam or in or thailand and kind of overwhelm the waste management system there until they've passed bans so it's a series of countries now have banned waste imports so the result in the global north and in the west has essentially been it's kind of galvanized a sudden reinvestment in our waste infrastructure you know in the UK for example where I am right now there's been a huge like a series of big waste reforms there's been big investment by large waste companies in building new recycling facilities for example because at the same time

as the as the waste market has crashed we've had this huge kind of environmental awakening among consumers about the impact of of our waste and our carbon footprints and particularly the impact of plastics on the oceans so all of a sudden people are you know choosing to buy recyclables more and recycle plastics more it's become very desirable for companies to include recycled plastics in their products. In some countries now, like the UK, it is legally mandated to have a certain quantity of recycled plastics now in packaging in the UK. So you kind of have these two competing forces. And the result has been a kind of upheaval in the waste industry that is kind of quite remarkable and a level of change and upheaval and innovation that has been a long

time coming. So it's a very exciting space, but there's been a lot of upheaval in a short period of time. Well, you mentioned cobalt and lithium earlier, and you had this stat in the book that stuck out to me, which is that only 17.4% of electronic waste is recycled. So we spend a lot of money on our phones and, and, you know, we, we, I think we're starting to use them a little bit longer, but we are still so bad at recycling electronics. How, is there any way for us to get better at this. Yeah. So, I mean, the good news about that is that, you know, electronic waste, we kind of went through this incredible glut period of electronic waste, because whenever you have a new technology that is kind of really rapidly improving, and smartphones is a classic

example, you know, that technology was improving so quickly year on year that people were constantly wanting new ones. And so, we were getting new phones every 12 months or every 24 months or what have you and the the level of waste the wastefulness inherent in that is kind of astonishing to think about particularly when you understand the value of of the materials in your smartphone right there's not just things like gold and platinum it's cobalt it's neodymium it's like there there are all of these rare metals in there that are incredibly difficult to get to and so there's real value when we throw them away and for a long time you know this this stuff was essentially disappearing it was going in landfills or it's going in you know your kitchen drawer or

the back of a cupboard somewhere and so we don't really know the end fate of a lot of a lot of this material now we're in a in a situation where you know tech companies and governments have kind of realized the value locked away there and so there's a lot more focus on recycled content and you see companies like apple doing interesting things um with e-waste recycling that one of my kind of uh most surreal moments in the in the reporting of the book because i went to write about eri which is one of the biggest uh recycling electronics recycling firms in america i went out to their big plant in fresno and you go into these places and again it's it's essentially like if i don't want to oversimplify thing but it's like the most gigantic blender you've ever

seen uh you know it's a it's a a disassembly line and they go through these things and they're kind of crushed and then shredded and all of these different kind of magnetic and flotation means of kind of separating out the different materials the silicon rare earths copper you know they they have extremely like high-end ways of separating these materials but a lot and then at the other side of things there are like literally guys with like hammers like hammering stuff apart and and like because when you know when you get something the size of a tv there are some stuff that's like literally glued together and so before you can recycle it you have to like tear the glue apart so it's kind of a fascinating industry to be a part of and yeah the growth is is quite

remarkable and the value there is is truly not quite under not quite appreciated yet but it but there's a great statistic in the book which is that there is more gold in a ton of e-waste than there is in a ton of gold ore so you end up with this situation which is what we have now that large mining companies are among those investing in electronic waste and in what they call urban mining, which is essentially mining old landfills eventually to see what metals can be recovered from there, because there's so much value. That's fascinating. So, instead of trying to dig gold out of the earth, we're now going to try to dig it out of the trash.

Well, precisely. And it makes a lot of sense, right? Because particularly rare metals, you are having to dig insane low amounts of oil you know the concentration of of copper ore now when you mine it is much much lower than it was at its you know at the peak of copper mining for example so it's getting harder and harder to get this stuff meanwhile we've got you know huge quantities of it already on the surface essentially you know that we don't have to dig down and find so so the ability to find this stuff in our landfills or in our kitchen drawers is suddenly very competitive so which is which is why you can find even now that you can go and you know sell those old electronics for for a decent price and someone will take it off your hand and it will

get turned into a new iphone or or something and i would encourage everyone to do that if you can because honestly if you want to talk about waste like the mining industry is crazy and uh the the thing that i think shocks people the most is if you understood the discrepancy between industrial waste versus the household waste you know we spend so much time talking about recycling and things we do at home there is one estimate which i cannot i think i have to credit this um to an academic called max liberon because i read it in in his book but i think it comes from old epa data uh that by weight which is a very crude measure 97 percent of all of all waste is industrial waste and when you consider like how much of that is the petrochemical

in the mining industry and it's literally you know weight because it's heavy rock and things but you know it's so overwhelming the amount of industrial waste it's almost hard to picture and a lot of that comes from mining so if we can find ways to get that out of our old smartphones and cut down the amount of mining that we need to do then you know we'll all be better that's just a portion of deidre's conversation with oliver franklin wallace that captured your interest the full-length interview is up on the motley fool money youtube channel as always people on the program may have interests in the stocks they talk about and the motley fool may have formal recommendations for or against so don't buy or sell anything based solely on what you hear

i'm ricky mulvey thanks for listening we'll be back tomorrow Thank you.